The Secretive PE Firm Behind Burger King, Tim Hortons, Skechers and Hunter Douglas (3G Capital)

My guests today are Alex Beering and Daniel Schwarz, co-managing partners of 3G Capital. 3G's built one of the most distinctive firms in investing around a simple idea.

There are only a handful of truly great businesses and even fewer great CEOs. So instead of diversifying broadly, they concentrate deeply. Their model is to raise capital with the intention of making just one investment per fund, commit meaningful amounts of their own money alongside their partners, and focus all their time and the best people on that single opportunity.

What sets them apart is that they come to investing as operators. Alex previously ran the largest railroad in Latin America and Daniel served as the CEO of Burger King and many of their partners have spent years as CEOs, CFOs or senior operators inside of complex organizations.

When 3G buys a company, they step in as operators, align incentives with ownership and work alongside management to improve the business. That approach has produced a series of iconic deals, including Burger King, Tim Hortons, Hunter Douglas, and Sketchers.

Along the way, they've also become known for developing talent, giving young leaders real responsibility and ownership, and holding an unusually high bar. Please enjoy this great conversation with Alex and Daniel.

Once you've heard from Alex and Daniel, I highly recommend you also read our in-depth profile on them and 3G Capital. They gave our managing editor Dom Cook unprecedented access, and the outcome is an excellent profile about the 50-year history of 3G and how the model began with George Apollo Lemon in Brazil.

I want to start with this one investment per fund concept because first of all I just think it's extremely cool to think about having a big pool of capital to deploy into one thing and all the work that goes into that what ends up being that one thing despite looking at countless other businesses. Where did that concept come from? Because it must dictate so much about the nature and culture of the investment strategy firm people.

One investment per fund sounds interesting and I know it is from our past discussions. Where did that come from?

So that comes from our Brazilian roots where my co-founders had done this beer investment that had worked really well and then as they branched off into private equity and a predecessor firm of this firm in Brazil. They attempted a bit the more traditional approach also that went okay.

But then we understood a couple of lessons from that. One was that really really great businesses are rare. There are not that many of them to begin with. Secondly, the ones that exist, they are not oftenly actionable.

So therefore, if you're going to be in the business of putting a lot of your own capital to work and if you're going to be very involved, the people that you're going to need to deploy there and the time are also a scarce resource.

So when I started the firm in New York in 2004, we already had those things pretty clearly understood and that was a premise that to the extent that we would get involved with businesses on a strategic long-term basis, it would be one at a time.

We have this luxury of only having to find one great business at a time. And I think, you know, if you're investing your own capital and if that's the lens through which you're looking at the investment, you want to be really patient and wait until you find that great business.

The other way to look at is it's so hard for us to find a great business to invest in. How are we going to find 10? It's so hard to find great people to be great CEOs. So, like, how are we going to find 10?

So, I think it's great to be able to buy one business every once in a while and send in your A++ players to get involved.

Is there any psychological fear pressure associated with knowing that it's just one all eggs in one basket and watch the basket very closely? Like what psychology does that feel like?

As much as the psychology, I think it drives the investment process a very rigorous analysis of what the downside can be. And in our case, the downside has to be capital preservation with some small return of sorts and that drives business sort of decisions and it also drives capital structure decisions.

I think that's where it manifests itself the most. If you were to look at businesses that we didn't buy or deals that we didn't do over a long period of time, I think more often than not that would be a function of us not being comfortable with a potential downside scenario or a downside case as opposed to us not finding a path to a great case.

I think it's a healthy pressure that we put on ourselves to make sure that we're not compromising on business quality and we're only rather do nothing than our capital structure being.

Exactly. Yeah. Like we're going to buy a great business. We're going to leverage it appropriately, not too much.

It definitely makes it harder to price risk. If you think about like the traditional portfolio approach where it's the portfolio construction part of your Yeah. you have 10 businesses and if one has some idiosyncratic risk or whatever, it's like it's harder to price risk.

So, we take that into consideration, but then on the other hand, you have this team here who they're really excited to do a great deal and often times they're going to bet their own careers as is the case with Alex and a railroad that he bought in Brazil, as is the case with Burger King that we bought here for me.

And so when you're betting your reputation on something, you want to hold it to the highest possible standard.

If you think back to that the very first days, 2004 thereabouts through to today, 20 years, how has your idea of what constitutes a great business changed the most through all of these investigations and running the five six businesses? What's most changed about your views?

We over the years had to refine our investment process in terms of making that determination whether a business is great or not. as a function of how the world changed because of technology.

The possibilities of a business being disrupted in this day and age as compared to maybe 20 years ago are significantly higher and therefore the investment process and the investment discussion around disruption needs to be significantly more detailed and thorough.

Yeah, I agree with that. Disruption and disintermediation. I think we have a greater appreciation today for businesses that own the relationship with their end customers.

If you have that, you're less likely, I mean, it seems obvious, but less likely to be disintermediated through some new disruptive force.

How did you most learn that specific lesson, the disintermediation lesson?

Since 2004, we followed restaurant businesses. We followed packaged food and consumer packaged goods businesses. There is this ongoing shift we see in society of the share gain of private label.

If you're a large retailer, be it a Walmart and Amazon, Costco, if you own the relationship with your customers, you have this ability to disintermediate the company selling to you.

Kirkland happens. Yeah, Kirkland's a fantastic brand. It's one of the largest in the country and you and I probably both have plenty of Kirkland products in our household.

Compare contrast that with the restaurant business. So Burger King or Tim Hortons, Popeye's or Firehouse Subs, I mean those just a few great brands. I mean, we happen to be involved in them.

Each of those brands owns the relationship with our end customers. And so if you want a Whopper, you're coming to a Burger King or in the case of our Hunter Douglas business. If you want blinds, you're coming to a Hunter Douglas dealer or one of our shop at home dealers.

And so I think we have a much better appreciation for that. If I think about just the businesses themselves, we were joking before about the simplicity of the business. And maybe when you're talking to Buffett about one of these businesses, don't make the business description complicated.

And it's interesting how burgers, shoes, shades, you could actually do it in a word in many cases with your business. You don't even need a whole paragraph. Maybe say a little bit more about that.

We're not well suited to manage businesses that require high IQ. be honest with you, we have some mutual friends who are much better suited to invest in the next technological autoflow. Exactly. We're just not that.

We've managed to stay pretty disciplined to stick to good, relatively easy to understand, well-moded businesses that we and our partners here could kind of wrap our heads around.

Businesses that have ideally been around for a long time with strong brand franchises that we could own and grow and maybe improve a little bit. As Munger used to say, "Show me the incentives, I'll show you the outcome."

In addition to the one investment per fund, I'd love to understand the other distinguishing features of how the capital is set up, who the LPS are, what the incentives are, how the fees work because almost everything you do is a little bit different than the traditional model. Maybe you could walk us through what those are because those so then determine the outcomes.

Two of the things that are different, two or three of the things, one is the proportion of house capital. We and our group of co-founders and partners and whatnot are the largest investors on each and every deal that we do. Number one.

Number two, the balance of the capital that's not ours is different from a traditional PE firm in the sense that that's a much higher component of high net worth individuals and families around the world, some sovereigns also, but a very different LP base. and also the fact that we over the years have devised mechanisms that allow us to be invested for a long period of time.

We invested on RBI for 15 years in counting and so on. So I think those are the three main differences. One additional large difference in our case is the folks here have largely all been in both investing roles and operating roles.

And so in Alex's case, he was the CEO of the largest Brazilian rail and logistics company, the largest Latin American rail and logistics company. I was the CFO and CEO of what was Burger King and now is today Restaurant Brands International.

That applies to some of our other partners here as well. I think this experience of being an operator and an investor allows us to ultimately be a better investor and allows us when we get involved in these businesses to be able to send our own people in who are partners of ours here who have also been CEOs and CFOs and operators of businesses and who are well incentivized to create value at the company that's directly linked and aligned with us and our limited partners.

If you think about this unique nature of it being so much house capital, you're on the line with all of your LPs and you think about the search for let's say Hunter Douglas, which was a transaction 3, four years ago. Talk about the length of time that you're willing to engage with a company, maybe in that specific case, how long it took you to get to know that business and how the transaction came together.

These are very unique ways and long durations and I'd love just to like put some meat on those bones.

I've mapped Ralph in the mid 2000s. First in Switzerland and then we got also close to his family here. The two sons, one resided in Greenwich too recently and the other one resided here near the city and had a good relationship going for a long time.

I think that not until few years ago was Ralph aged and he was trying to organize his family affairs and he was trying to carve a solution for the fact that one of his sons wanted to remain involved in the business which is David our partner and he also cared what happened to Hunter Douglas phoning a hundred years in the family And that's the context in which we started a conversation.

But that was already 2021 mid year. I visited him in Switzerland in his home and had a conversation about it and he was then brainstorming what to do and I think the outcome of that conversation was that he would give us a window to present him with a proposal and then if he liked that proposal we would move forward.

That's sort of how it started. So sort of a 15-year investment of time to get that window in this case. That's right. I like that we're inserting the word window here many times, but maybe just some additional color.

You had a long-standing relationship with Ralph. I had first met David in 2007. David is Ralph's son, who is now our partner in Hunter Douglas. He he rolled his shares into the transaction a few years ago.

They invested alongside us in Burger King. We built a good relationship, lots of mutual respect. David came down, Alex, Alex, I guess, and I organized to have some of our partners come visit us in Burger King in 2011 or 2012, and we gave a presentation on what we were doing.

And remember spending time with David and he said, "This reminds me in some respects of Hunter Douglas, this kind of entrepreneurial startup type culture in a traditional business." And we kept tabs on their business through the years as well.

And we watched David do some transformational acquisitions along the way to evolve that Hunter Douglas business to become even more direct to consumer. So to go to both selling through dealer and direct to consumer.

We were big admirers of that business for many many years and we had the history of following the business for many many many years prior to Alex and Ralph chatting about succession and next steps for the business. So we played the real long game.

David did really sort of shape the company through those deals. I think he did. David evolved Hunter Douglas into a business that we had an even greater appreciation for 15 years after meeting him.

Maybe since it's a company that probably people have seen can imagine is a product that's accessible and simple to understand. Use it as an example to explain the criteria that you love in a business. describe the business and but more importantly what it is about it when you did the transaction that was so appealing.

The business basically owns the relationships. It doesn't have a concentrated customer or a concentrated supplier. So it's a business that's really well positioned in an industry purchasing windows covering products is not a frequent thing. It's not something that you do every week or every year even.

So I think that really sort of set itself well for a business. So I understand that last piece meaning because you do it infrequently, brand and familiarity matter a lot. Like if you're not going to do it often, you'd rather just go also a lot of times you do it in the context of a renovation for instance where it's never a big part of that also.

So I think it lands itself quality matters. Our quality is almost in a way too good. I wish people would replace the product sooner. The TAM for the interior and exterior window coverings is around $70 billion. HD is far and away the largest player.

We have this combination of scaled manufacturing coupled with scale distribution and that allows us to either through our own sales force or through our exclusive dealer network deliver the product within a week, two weeks, which is typically what people would expect their window coverings to be delivered.

Every product is largely custom made to measure. So there's no one single skew. And so we have billions of permutations of styles, colors, patterns, sizes. And the business was around prior to us buying it for about a hundred years.

And we talk about all the things that can change in the world and disruption risks, but we're highly confident about the sun rising and the sun setting. And you see houses are being built with larger and larger windows because people like natural light. And so it's a product that's here to stay.

We're the number one leader. There's some volume growth. There's a little bit of price growth. And as I mentioned, as we mentioned earlier, there's this historical roll up element of the business where you're buying small players in the industry and we are the natural home for many of these small players.

also climate change and the increased awareness of the risks associated with that and the need to save energy and whatnot. I mean, that's a positive driver for this business. A lot of companies brag about all their ESG initiatives and energy savings. Our window coverings actually save people tons of energy. It's a natural way to keep your house cool.

I mean, it sounds like sort of the ultimate example of like there are no two kids in a garage in Silicon Valley wondering how to disrupt Hunter Douglas. It would just be a senseless endeavor.

I think it's one of these things where the TAM is large, but it's not so large and we really have this scaled manufacturing coupled with the scale distribution. And so, I think gaining distribution is hard. It's quite hard given the way you go to market because there's a service component, there's an installation component to this product, this process.

Given the returns that you've demonstrated are possible, RBI is up 30x multiple on capital or something and going. Why do you think there are not more firms like 3G that do serial single investment extreme focused style? Why are you the one that I'm aware of?

I have a few thoughts on this. You've seen how much value and enterprise value has been created in the alternative investments like lands broader landscape and so how often do people Alex tell you why don't you guys buy more businesses why don't you raise larger funds why don't you get more diversified so I think there is this pull to do all that for a reasonably good reason I don't presume that our model is superior to others there incredibly successful firms that have very different model, very different way to going about their business than us.

And I think what's important for every successful firm, I mean, we're no exception to that, is find out what works well for you. And for us, for a very long, for decades now, that's the model that works really well for us to invest our capital, to compound the capital of the people that are closed and invest with us. And I think we should stick to that and not try to emulate other people's models.

And that's probably true vice versa. And most successful firms have their own model that they develop that works for them, for their culture, for their people, for their capital.

I think also staying quote unquote small allows us to attract some of the best best best people on the investment side here because we could still offer people founder-like economics, a path to partnership, a path to taking on responsibility much much faster than those people might have if they take a kind of traditional investment path. Yes.

And this is a place where we think that over time the firm should always be owned by the people driving it. And historically that has been the case. My co-founders and me and then I'm still here. My co-founders over time become more on the capital side. Daniel was an analyst and sitting here today. I was an analyst early on in the predecessor firm of this.

So we do have a demonstrated culture that attracts people that way. I love the notion that both of you ran businesses as the CEO and I'm especially curious about the forged and fire moments from running the Brazilian railway. What were the aspects of operating as the CEO that you most remember that most shaped how you think about running a business well or investing well?

Within a few weeks in the business, it was apparent that it was an operations challenge. Meaning the customers around the railroad all wanted to be serviceed by the railroad and they couldn't because the service wasn't good enough. And the focus on basically turning the assets faster and more safely was really the driver of the company's success which drove me in turn to spend a week a month in overalls driving trains and going around the country.

That allowed me first to get close to the engineers in the business basically which were crucial the people that run the trains and given and understand how important they were in that business in every respect and do things to improve their lives that you could only do if you were out there with them.

For instance, I was young and athletic and sitting in a locomotive for eight hours in those really old chairs was really tough and the cabins were cold because they were not sealed properly. So, all of that was not expensive to address. We didn't have the money to buy brand new General Electric locomotives, but we could fix that.

And we could also fix all the engineering quarters where people sleep between changeovers which were also in dire straits conditions. And we were able to get them all fixed, get new beds, get satellite TV for sports and get them all that done. That really drove a lot of support from the engineers.

We were able to then capitalize on that by having on board computers rank people on their fuel and safety performance nationwide. I mean real roers are very proud people and that drove 30% reduction in fuel for example which was a number one cost in the company that drove much higher asset turns because we then did the same thing in the yards and there were all the ideas and participation and these people all had the solutions for things.

they just needed to be engaged and to address this operating challenge which was the biggest value creation driver. So that taught me a little bit about managing by walking around and not sitting in an office and getting fab information through PowerPoint.

It seems like that's one critical lesson in the general category of finding hygiene and inefficiencies within the businesses that you buy to make them a lot better. This like an obvious thing to say like yeah of course you want the business to be more efficient. How else have you learned to do that effectively across several different kinds of businesses? What are the playbooks that you've most enjoyed rolling out businessto business?

Not just to fix, but to find the inefficiencies in the first place. One of the things that's interesting, you hear Alex's story in the railroad and a lot of these initiatives he outlined were his, but he benefited from some great advice from co-founders. our co-founders absolutely who two of whom were CEOs of operating businesses themselves at relatively young ages and who gave Alex a shot when he was 30 and they gave you some real practical advice which you then passed on to me when I I guess became CFO or CEO of Burger King which if you hear some of this advice you'll be able to connect it to some of Alex's actions which were at the time for me deeply insightful comments that were very contra to how I behaved and acted as an investment analyst.

Things like manage the people, not the business. Centralize the what, not the how. Go around asking lots and lots of questions. Don't ever be afraid to ask people questions, even if something that seems obvious to the organization might not be as obvious to you.

When we were buying Burger King, I'll never forget to just show how naive maybe I was at the time. Alex says to me, we announced the deal. and Alice, well, now it's time we got to assemble our team. I'm like, Alex, come on. We just bought this business. It's like $4 billion. It comes with people, right?

And Alex is like, well, it does, but I think it's really important. And we got to assemble like an A+ worldass leadership team. And just kind of dawned on me, which he had experienced this in years, a business is nothing more than a bunch of people kind of running around doing things. And quality of the people is paramount to the quality of the business.

In these businesses, you want to create a culture centered around ownership. And that starts with the leaders of the business who need to act like they are and behave like they are and be the shareholders of the business. So the leaders need to be the shareholders. The leaders can't just be quoteunquote the management. Management and shareholders need to be one and the same.

And so once you've established that, now you can go to the next step. It's like how are you going to manage a business if you are its owner? You're going to look after all the money you spend as if it's your own. You are going to make decisions based on what is in the best interest of the business. You always have to put your business before yourself.

And so typically when we come into these businesses, we love doing benchmarking exercises where we will look at expenses cost by area within the business. So let's say by the North American group, the European group, the Asia-Pacific group. And then we look at by category all the way we're spending money. We call this zerobased budgeting.

And we basically give visibility on cost to everyone. And we say, look, if this one group is spending this much on this area, well, why can't we apply policies throughout the organization to benchmark both with ourselves internally and other companies externally? and you find enormous amounts of savings and just doing kind of simple internal and external benchmarking.

But you only are able to capitalize and achieve those savings if you have buyin at the top of people who view this as owners of the business who want to run it optimally for the business and not necessarily for themselves.

What does centralized the what mean?

It's basically to give people freedom to figure out things and focus the discussion in terms of what is it that we want to accomplish which is where I think as a leadership of the company that's an important discussion that you should be really a part of that discussion and then once that's settled then give people freedom to figure out the how because you really want to push push decision making close to the problems and then as long as we are all aligned in terms of what is it that we are trying to achieve on a more broad perspective the actual how you going to do it and how you going to go about it the team should have a lot of autonomy on that really good people that Dan is alluding to which is absolutely key to everything they like freedom to figure out they like to solve problems they like to be challenged and they like the freedom to make decisions.

So you shouldn't have a culture where making mistakes is a problem. Making mistakes trying to figure out a problem that's part of the company's ambitious agenda should be something that happens where you learn something from it and you move forward. I think that's what this thing about centralizing the discussion of the what and then decentralizing the how it comes in.

What was the most stressful period for you as CEO of Burger King? What was that moment like?

I try not to get too stressed work-wise. I try to always keep things pretty even keeled. I had this basketball coach who once said, "Pressure is something you put in a tire." So, I always try to keep that in the back of my head.

I'd say there was one time that I I was pretty stressed was this was the summer of 2014 We had bought Burger King in 2010, billion and change of equity. Within a couple years, it was objectively a great outcome. Everyone got all their money and then some back. And by mid 2014, we were like a $10 billion company. And we had owned 70% of the company. So objectively good.

And we all decided, Alex, myself, and Josh Kabza, who was our CFO, we all got really excited about buying Tim Hortons. and we were actively negotiating an acquisition, a merger of Tim Hortons. Alex was meeting with their CEO on a regular basis. Alex was our executive chairman and I was a CEO then.

And we're in the middle of doing this prolonged negotiated deal. We get wind from the reporters at Bloomberg that they're going to run an article on us at Burger King really centered around our ages, the ages of the management team. were trying to buy this iconic Canadian institution asset, Tim Hortons.

And there were some probably reservations on the Tim Horton side around us and business and Burger King. And so we're in the final stages of negotiating this deal. The article comes out. The title is Burger King is run by children. That wasn't a helpful.

I'm touring restaurants in India with our local master franchise joint venture partners. We're driving around. I don't know if you've spent much time in Mumbai. We're driving around stuck in bumper-to-bumper traffic and the article comes out. I'm reading it. I'm like, "This is just the worst article that could have come out at the worst time."

Meanwhile, everyone's writing us. Oh, congrats. Congrats. What a great investment. Really cool. And I was like, "How are we going to get ourselves out of this? This is exhibit A for the board to not want to do a deal with us." And but we worked and Alex and a lot of negotiation took six months. Yeah. I was pretty stressed then. It took a lot of work to get them to be excited about us and we had to point out all the factual inaccuracies in the article.

I'm gonna come back to the everyone being young thing just in a minute because I think it's so interesting. But when we first had lunch, you told me this story about the funny back and forth with Tim Hortons and your initial outreach to them. Can you tell that story as well?

Sure. I was able through a common friend to get a dinner with the CEO near Toronto and I flew out there. We had a great dinner, really hit it off, and he was open to potentially receiving a proposition to put the companies together, which we maybe a week later or two weeks later went to Warren and Warren was super super reassuring as we talked about in a nearly instance.

I mean, I remember 10 seconds into the call with Warren, he really really praised the quality of the business and then and I always go back to that and saying how right he was and we didn't even fully appreciate how good a business it ultimately was, which we do now. But anyway, so that went really well. So we had the financing lined up. He was open to receiving a proposition. We put a proposal together and we presented to him.

Then there was radio silence. for a week. We felt radio signs for a week is normal. That's big deal. They're deliberating about it. But then that became two weeks and three weeks to four weeks. I had only bought one company at that point. So I'm like, Alex, is this normal?

I was like, I'm saying that it kind of is. But he's like, don't worry. He's like because he wanted me to focus on the like, no, don't worry. It's totally normal. Totally normal. Totally normal. Take eight weeks or seven weeks. So, six weeks into it or something, I got an email back basically saying, "Listen, thank you so much for your proposal. We're not prepared to move forward."

And something like, "Best of luck with your future endeavors." And I really had two lines, maybe a two and a half line, at which point I picked up the phone and called this guy whom I had hit off so well with, and I said, "Listen, thank you for your email. I mean, received of it. Can you elaborate a little further? To which he answered, "No, can't."

I mean, what else do you say? You know, I hanged up and I called him said, "How did it go?" I said, "Well, it was short. Not so well. Kind of short." And then we did some more work and made improvements to our offer. And then we sent it to him, revised it offer to them in the hopes that that would be enticing.

And then we were prepared again to sit and wait for an extended period of time only to be surprised and get a response back in hours two or maybe within a day. I think I want to say less than a day saying thank you for your offer. We are not prepared to move forward and we wish you again the best of luck with your future endeavors.

The good news is neither of us are shy and both of us are persistent. So now we really scrambling and trying to find every possible way of engaging in a dialogue and figuring out what is it that we had to do if anything to get a conversation going.

Then ultimately we found ways by means of which were able to meet with him and his chief financial officer and I was able to then track down with me again and engage into a conversation and gain some insight in terms of what is it exactly that we would need to do exactly to get these companies together.

And then after some time in that conversation we're able to have a revised offer that they thought was then enticing enough. We then moved on to the usual drafting and legal and due diligence phase of it only to receive a call on a Sunday afternoon from the Wall Street Journal saying, "Listen, we know you guys are about to announce the deal. We're going to go live with it and you guys have 30 minutes to decide whether you want to say something."

It was delicate at the time because Tim Hortons is a brand of a magnitude that I almost want to say that I'm unsure whether exists in the US terms of a consumer. It's ubiquitous in Canada. It's just so so large the brand in Canada and so important for the Canadians that this information about a deal coming out the wrong way at the wrong time could have killed it after all this six month.

So you ask them when is it that he was nervous? This is when I in spite of my then already abundant of gray hair was nervous.

How did it ultimately get done and what was the reason that he was slow and quick in his initial two responses?

So apparently I mean we were not preview to all the details but the board dynamic there between him and the prior CEO that was chairing the board and whatnot there was some genuine doubt about the deal and they were discussing it intensively I think if you rewind a bunch of years earlier it was a subsidiary of Wendy's and that's right that's what drove the you like do we really want to be attached to burger brand again but ultimately I think we were able convinced them that this was going to be great for everybody, that this was going to be a portfolio of brands, that we would take Tim Horton's international and that most importantly the brand would retain its independence and independent management and focus in Canada.

And also I think that what sealed the deal for them of course the financial proposal but it was also the reassurance on our part that our owners in Canada or Tim Horton's owners which were the heart and the core of the brand would really drive under our ownership. That was key for them. They really cared about that there were thousands of owners in Canada. They made the brand into what it is since the franchisees the franchises which which in the case of Tims they call them owners.

I think that was key for them. Once we disclosed what our plans were and why we thought that they would work out and so on and so forth, that went a long way with them as well